Markets Today: Uneasy calm

A quieter night overnight, with no large moves, but no strong reversals either. US equities eeked out fractional gains, while Europe was still weak. Yields were a little lower and currencies in G10 for the most part flat. Oil did rise and Glencore, yesterday’s prophet of doom, bounced 17%.

A quieter night overnight, with no large moves, but no strong reversals either. US equities eeked out fractional gains, while Europe was still weak. Yields were a little lower and currencies in G10 for the most part flat. Oil did rise and Glencore, yesterday’s prophet of doom, bounced 17%.

Markets are displaying signs of distress as concerns around EM risk tolerance return in force, This is added to by the additional liquidity needs in Asia for the long holidays later this week. This has led to an extraordinary drop in G10 yields and rise in EM yields.

Concurrently, EM currencies are weaker and funding currencies such as JPY, and EUR (in this cycle) are stronger. The typical behaviour for the high yield, commodity currencies (AUD and NZD) are in place. They are under pressure. Measures of market volatility are higher, with credit spreads much wider, VIX (equities) has risen again and MOVE (bonds) has shot higher.

EM central banks are implementing their contingency plans by increasing liquidity in the local market (HK), providing USD swaps to local corporates (Brazil) and intervening in the local currency (multiple).

Overnight, the IMF warned of the $18 trillion emerging market corporate bond market. To give you an idea of the strains confronting some EM countries, the 10-year bond yield in some are presently at the highest level in 12 months. Compare this to the “norm” in many G10 and the more solid EM countries, where the yield is at its lows for the last 12 months. Historically, the stretched EM yields are still below peaks, but this rise in risk premium is another expression of market concern regarding underlying fundamentals. This is classic risk repricing, where countries with current account deficits, foreign denominated debt, and particularly commodity exporters, are responding to changing global conditions. This risk repricing is beyond any debate about the Fed raising interest rates 25bp or not.

The nervousness in EM is translating, in this global interconnected world, to corporates who deal with EM, to economies reliant on global demand, and commodity exporters, like Australia, And that is why Australian equities were down over 3% yesterday, the ASX 500 cracking the 5000 level. (Japan and others also broke key levels).

Given all this, the less significant economic data isn’t going to create much of a dent in market interest. That said, it was odd that US consumer sentiment bounced, as did European sentiment.

On the negative side, was the US advance trade numbers. This is for goods only, but it showed a big rise in the deficit as exports dropped 3% and imports rose 2%. That will weigh on GDP estimates.

In Germany, the CPI estimate was soft (see below).

Coming Up

Given the broad environment, it may be hard to get much focus on the economic data, but it will help guide expectations for central banks that can have a broad, global influence.

Japan’s data is up first, and really doesn’t often move markets. The inflation data was ok last week, but today’s industrial production and retail sales are expected to show improvement. For those looking for the BoJ to increase its QE program, this data needs to disappoint (absent a significant appreciation of JPY from present levels).

Similarly, after Germany’s flash PMI last night was disappointing, tonight’s Eurozone CPI is released and will sway beliefs about the ECB’s QE program. With EUR stronger in recent days, (as European equities fall and hedges are unwound), the ECB may look for additional easing. A weak inflation outcome is one way for them to do this; the risks are now for a soft outcome.

In the US, Yellen is speaking (5am AEST) and if she wants to clarify anything, post this bout of risk aversion, then she may tweak the message from last Friday. It would elicit a barrage of scathing rhetoric were she to do so, and it is not the central scenario, but stranger things have happened. The US also releases the Chicago PMI (these have been soft) and the ADP ahead of Friday’s payrolls report. They may not be super directional.

Domestically, Australia releases its private sector credit and building approvals data. A drop in the volatile building approvals series is expected. The annual rate will remain relatively good, the same with private credit. In NZ business confidence is released; it was extremely weak last month.

This is my last effort at writing “Markets Today:” thanks for reading and best wishes.

Overnight

On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years -3.70bp to 2.06%. On commodity markets, Brent crude oil +1.88% to $48.23, gold-0.4% to $1,127, iron ore -1.4% to $56.05. AUD is at 0.6991 and the range was 0.6937 to 0.7024.

About the Author

Emma is a Senior Currency Strategist and works with the global currency strategy team. Emma advises the Bank’s dealing rooms and clients on the Australian dollar and global currencies more generally.

Emma also makes regular comments to print, radio and TV media on currencies and global financial markets.

Emma has a Masters degree in Economics from the University of Adelaide.

Emma has been at the NAB since 2011 and previously has thirteen years experience working for global investment banks, as an economist and currency strategist, in Sydney, London and more recently in Hong Kong.